Entering into financial agreements as a business is an important decision. In fact, financial decisions are some of the most important business decisions that are made every day.
What happens to a business that enters into a financial transaction with another party? What liabilities exist, and what other risks are there to the business that enters into the transaction? How can lenders feel confident in approving businesses for loans or leasing?
What laws govern business to business transactions?
That’s where a UCC filing comes in. UCC filings are the standard for placing liens against other businesses or individuals with collateralized agreements.
This comprehensive guide will go over what a UCC filing is, who they impact, what terms need to be remembered, and how UCC filings on accounts receivable work.
UCC Filings: What They Are and Who They Impact
The Uniform Commercial Code, or UCC, enables businesses to place a lien against another business or an individual. There are different instances in which a UCC filing may be used, including:
- Loans for a small business
- Funding from a venture capital firm
- Leasing equipment or vehicles
- Establishing contracts between parties
- Selling goods and services
- Making bank deposits into a collection account
In each of these instances, the collateral for the UCC will vary. For example, if a business is leasing equipment, the collateral for that particular UCC filing is the equipment that is being leased. If a business is receiving inventory financing, the collateral for that particular UCC filing is the inventory being financed.
UCC filings can place liens against all or part of a business’s assets. An example of this would be when taking out a loan or working with a venture capital firm. The financial institution or lender would file for a UCC and place a lien against the party to which they are lending money.
UCC filings can be placed against businesses for things like bank deposits, bulk/warehouse sales and auctions, letters of credit, negotiable instruments, and sales and leases. With a few exceptions, there is typically only one lienholder per asset. Occasionally, a lender may take a second position. UCC filings prevent businesses from using assets to get multiple loans, which ultimately keeps them from overextending themselves.
UCC filings can also be placed against individuals for personal property, such as vehicles, but not for real estate, such as homes.
Terms to Know Regarding UCC Filings
UCC filings can be complex and overwhelming, but this guide aims to demystify some of that with practical information. Are there terms that don’t make sense? Does all of this seem a little redundant?
The terms to know section of this guide will help you better understand some of the confusing language around UCC filings.
Read through these before continuing to the frequently asked questions:
- UCC-1 Lien: A UCC-1 filing is used when personal property is used as collateral. Personal property can be equipment, inventory, and other assets of a business. They can also be used when purchasing a vehicle – a form is signed when buying the car that gives information on both the buyer and seller, plus the vehicle.
- UCC Blanket Lien: Blanket liens are used when a business or creditor has a vested interested in every asset in your company. Some common reasons a blanket lien might be filed include receiving commercial real estate loans, inventory financing, invoice factoring, SBA loans, or other short-term business loans.
- UCC Financing Statement: After an agreement is completed, a business can file a lien online very quickly for the appropriate jurisdictions. The financing statement must contain specific information to be valid. The information that will need to be provided is the debtor, secured party, and collateral description.
- UCC Security Agreement: When signing for a new loan or lease for equipment, a business will sign a security agreement. The security agreement may be a concise, but clear, statement indicating that the business is entering into a contract and there will be a lien filed against the business for the specified goods or assets.
These terms can hopefully shed some light on common language seen in UCC discussions. Now that the terms have been covered, there are several questions that can be answered.
Frequently Asked Questions
Most of the questions are asked frequently when talking about UCC filings. With this information, business owners and managers should have a clear understanding of how a UCC affects their organization.
What Is A UCC Filing On A Business?
A UCC filing on a business is when a creditor (a lender, financial institution, lessor, etc.) places a lien against another business (or, in some cases, an individual) for specific goods and/or negotiable instruments such as assets. The filing and security agreements are the only things that need to be done to validate the lien.
UCC filings can show up on business credit reports. They have the potential to impact a business’s ability to get further credit, so be wise in working with creditors that place UCC filings.
What Is A UCC Filing Used For?
UCC filings can be used for many things. According to the articles of the Uniform Commercial Code, UCC filings can be used for “sales, leases, negotiable instruments, bank deposits and collections, funds transfer, letters of credit, bulk transfers and bulk sales, documents of title, investment securities, and secured transactions.”
In broader terms, they can be used to secure interests in things like office equipment, technology equipment, specialized machinery, heavy agricultural equipment, and more.
How Much Does It Cost To File A UCC?
This is a tricky question because the answer varies from state to state. Some states have lower fees, while other states may charge upwards of $100 per filing. It’s important to keep in mind that the cost of a UCC filing protects the interest of the creditor.
To get an idea of how much it will cost to file a UCC in a specific state, contact that state’s Secretary of State for a fee schedule.
Are UCC Filings Public Records?
Yes, UCC filings are public records. Any business that wants to know the position of another business can look up their UCC filings and any other public information about them. This makes it difficult to keep the information from potential creditors.
Because they are public records, UCC filings will show up in most other credit and background checks on a company.
Is A UCC Filing Bad?
No, not necessarily. It depends on a business’s financial situation, its business goals, and its credit position. It can, however, impact the ability to get additional credit. When one company has a position for all assets, others may be intimidated by that position.
Make sure that, once a debt is satisfied, that a lien is released with a UCC-3 filing. This ensures a business can look for additional sources of credit.
Can UCC Filings Be Removed?
Yes, a UCC filing can be removed in one of two ways. The first, and easiest, is to have the creditor file a UCC-3 financing statement to effectively remove the lien. The other is to swear an oath of full payment with the Secretary of State.
UCC filings also expire after five years. This means that, if a business has already satisfied its debt, a business won’t renew it and it will simply expire.
UCC Filings on Accounts Receivable
As mentioned, UCCs can be filed on specific goods or on assets. One reason a creditor may file a UCC is for all accounts receivables. This is likely in the event of large financial transactions, like short-term loans, SBA loans, and inventory financing.
The term blanket lien was used previously – that’s what this is. A blanket lien on all assets, including all accounts receivables. While these are not inherently bad or good, they can make additional financing, and even alternative financing, difficult.
It’s important to enter into a UCC security agreement wisely. Read through this blog and commit this information to memory. Know when a UCC may be filed and how to have one removed when a debt is satisfied.